Principles of Investing for American Citizens Living in the UK: Principle Two - Structure Your Investments Tax Efficiently
As both the US Internal Revenue Service (IRS) and the UK’s HM Revenue & Customs (HMRC) can demand their pound of flesh from Americans residing in the UK, tax efficiency should be considered the holy grail of any investment strategy – nobody likes paying double tax, after all!
"You must pay taxes. But there's no law that says you gotta leave a tip." ~ Morgan Stanley
As both the US Internal Revenue Service (IRS) and the UK’s HM Revenue & Customs (HMRC) can demand their pound of flesh from Americans residing in the UK, tax efficiency should be considered the holy grail of any investment strategy – nobody likes paying double tax, after all! To invest tax-efficiently, it is essential to appreciate that Americans are taxed on a worldwide basis, irrespective of their residency, domicile, or where income and gains arise. Coupled with the various nuances of the domiciliary rules in the UK – which were sensationalised by the headlines focusing on the financial affairs of Rishi Sunak’s family - investing tax-efficiently as an American living in the UK can be challenging and potentially costly if not approached correctly.
Although toeing the complex line between US and UK taxation can be challenging, it is not an insurmountable task. To ensure your investments are structured tax efficiently, there are several key themes to understand before beginning your investment journey:
1.) If you are an American citizen living in the UK, how will you be taxed in each jurisdiction?
If you are an American citizen that has recently moved to the UK, you should familiarise yourself with the Arising vs Remittance Basis of taxation in the UK. Although it may not make for the most exciting reading, it’s an exercise that can pay (literally!) dividends in the long run.
As a starting point, the Remittance Basis of taxation will only be available to you if you are a UK resident but not yet domiciled. It can allow you to shelter the income generated and capital gains realised on non-UK assets (like a US brokerage account or US rental property) from UK taxation providing you do not remit (e.g., bring the money in) to the UK. Opting for this method of taxation may not be without costs, though – if you have been resident in the UK for more than 7 years, you may have to pay the “Remittance Basis Charge” to continue enjoying this privilege, which can either cost £30,000 or £60,000 per annum depending on the length of your stay in the UK. Additionally, if you will likely need to access these offshore funds at some point whilst living in the UK, you will want to make sure you take appropriate steps where possible (for instance, income sweeping) to limit the cost of future remittances.
As the Remittance Basis of taxation allows you to shield US assets from UK taxation, it can be an incredibly useful tool if your stay in the UK is more of a sojourn rather than a long-term move. If you fall into this camp, you may technically not need to structure your US investments tax efficiently from a UK perspective. However, this should still be considered if you would like the ability to remit your non-UK assets without incurring additional tax charges.
If you are an American citizen domiciled or Deemed Domiciled in the UK, you will pay tax in the UK on the Arising Basis. This method of taxation exposes your worldwide income and capital gains to UK taxation. If you fall into this camp, your non-UK assets would automatically fall into the scope of UK taxation and need to be structured tax efficiently from a UK perspective. We believe that most Americans will end up paying tax in the UK on the Arising Basis after being in the UK for more than 7 tax years as paying the Remittance Basis Charge often doesn’t make sense when also taking the requirement to pay worldwide US tax into consideration.
Fortunately, or perhaps unfortunately, depending on how you look at it, the US’s method of taxation is easier to understand. If you are a US citizen (including accidental Americans), you are required to report and (potentially) pay tax on your worldwide income and gains irrespective of your residency.
2.) If you are taxed on the Arising Basis, are your investments structured tax efficiently in both jurisdictions?
a. We and many of our fellow counterparts in the industry have written copiously on this topic. If you are interested in learning more about tax-efficient investments for Americans, please read:
3.) If you are a UK resident but non-domiciled, have you considered structures to protect your offshore investments from UK inheritance tax before becoming deemed domicile (which occurs after being UK resident for more than 15 out of the last 20 years)?
4.) Are your investments held within appropriate tax wrappers that shield your investments from US and UK tax?
Although this list is by no means exhaustive, it should serve as a useful basis for understanding your tax obligations and how you can structure your investments tax efficiently. As US and UK taxation can be a thorny topic, we highly recommend that you seek the advice of a specialist US and UK qualified tax advisor before making any investment decisions. If you would like to be introduced to a tax advisor or discuss any of the topics this principle touches upon, please contact Kyle McClellan or Ollie Cutting from our Private Wealth team.
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